California can’t force Indian tribes to share gambling profits to repair the state’s budget problems, the 9th U.S. Circuit Court of Appeals said Tuesday.

In a stunning blow to Gov. Arnold Schwarzenegger’s tactics when dealing with tribes wanting casinos, a divided, three-judge panel of the appeals court said the governor can’t ask for money for the state’s general fund without offering something of value in return because that amounts to an illegal tax.

The court upheld a 2008 ruling by a federal judge in San Diego that the governor was playing dirty in his negotiations with North County’s Rincon Indian band.

“This is a great, big message to the state,” Rincon Chairman Bo Mazzetti said. “Your days of trying to bully tribes around … those days are over.”

In the decision, Pasadena-based Judge Milan Smith Jr. compared the state’s efforts to those of the federal government when it took land from the Sioux after Lt. Col. George Custer reported finding gold in the Black Hills of South Dakota.

“Today, many tribes have struck figurative gold with casino gaming, and again, some state governments, just like their predecessors, are maneuvering to take, or at least share in, some of that figurative gold,” Smith wrote for a two-judge majority.

In his dissent, Judge Jay Bybee said tribes with casinos here and around the country have agreed for years to share revenue with state governments, just as Schwarzenegger was seeking.

“The holding … does not just upset the apple cart — it derails the whole train,” Bybee wrote. “If the majority is correct, then there is nothing for California to do but to authorize whatever (slot machines) the band wants. The band wins. Everything.”

The state will seek to have Tuesday’s decision reviewed by a larger panel of 9th Circuit judges, said Jeff Macedo, a spokesman for Schwarzenegger.

Legal experts disagreed on whether the case would be reviewed by a larger panel, or by the U.S. Supreme Court, should it be asked.

Macedo said the governor sees this as federal meddling.

“We still believe we were negotiating in good faith,” Macedo said. “This amounts to the federal courts again telling the state what it can and can’t do, and it’s not allowing the state the ability to negotiate these compacts.”

The ruling has big implications for Schwarzenegger, who campaigned on a promise to make tribes “pay their fair share” for casino expansions.

“It’s about millions and millions of dollars to the state of California,” said Matthew L.M. Fletcher, a law professor at Michigan State University who follows Indian legal issues nationally.

The ruling could affect other casino negotiations, he said.

The issue comes down to the kind of bargain that tribes and states can strike. The federal 1988 Indian Gaming Regulatory Act, known as IGRA, laid out how tribes can set up Las Vegas-style casinos. It said such gambling requires state approval, but that states can’t tax the profits.

Tribal governments can’t be taxed, nor can their operations, including casinos. The law also said that, if negotiations for compacts fail, tribes can sue to force an agreement.

Despite the no-tax language, states and tribes have entered into contracts in which tribes have paid part of their profits in exchange for permission to open casinos. The federal government has approved such revenue-sharing deals.

“Everyone agrees that’s a violation of IGRA, and we turn a blind eye because that’s the only way to do gaming,” Fletcher said, calling the idea that those payments aren’t a tax a “legal fiction.”

In the first compacts set up by California, in 1999, tribes with casinos paid into two funds — one for tribes with small casinos or no gambling, and the other for communities near casinos operating at that time. No money went into the general fund.

That was a problem for Schwarzenegger, who won office in 2003 in part by complaining that the tribes don’t pay state taxes like other businesses do.

He took office just as Rincon and other tribes, in the midst of a gambling expansion boom, were seeking additional slot machines.

Some tribes agreed to the deals the state proposed, which called for millions for the general fund. Others balked.

In the negotiations with Rincon, the state said it wanted money for the general fund. It said it would give the tribe the exclusive right to offer gambling — although other tribes have that right — and offered to give Rincon more machines or a longer compact. Rincon said it didn’t want to pay into the general fund, but would pay for the casino’s effects on its neighbors — including money for roads, law enforcement and fire protection.

As for the state’s offers, Rincon said it and other tribes already have a monopoly on Las Vegas-style gambling enshrined in the state constitution, so the state’s offer wasn’t a true bargain. It also said federal law prevented the state from demanding general-fund contributions in exchange for additional machines.

The revenue-sharing offer was a raw deal, the tribe said. In exchange for adding 900 machines to the 1,600 it had at its Harrah’s casino, the tribe’s annual income would increase by $2 million, to $61 million from the $59 million it made in 2005, according to an expert hired by the state. In contrast, the state’s share would go from nothing to $38 million.

“The federal law expects a win-win in tribal-state compact negotiations — not the state wins and the tribes lose again,” Mazzetti said.

If Tuesday’s decision stands, the state and the tribe would be forced into a 60-day negotiation period. If they can’t agree on a gambling deal, an arbitrator would choose between their best and final offers.

The decision is the latest in a string of legal losses for the governor.

In recent decisions, other federal judges have ruled that the state shorted tribes on the number of slot machines they were entitled to under the 1999 compacts.

Last week, a San Diego judge ruled that another North County tribe, Pauma, doesn’t have to pay the state millions agreed to in a 2004 compact because its leaders will probably win a lawsuit claiming that state negotiators tricked them.